A Tale of Two Cities

Wintry weather is not the only chill over Sydney and Melbourne’s housing markets. AMP’s Shane Oliver expects 5% falls in growth both this year and next. One alarmist says housing in both cities is overvalued by 25%. Whatever the truth, Sydney’s growth is down 3.4% over the past 12 months — its steepest fall for nearly a decade. And Melbourne eked out only 3.7% growth — its slowest since mid-2013. The chart below shows how much Melbourne clearance rates are softening. With foreign investors in non blue chip suburbs, retreating, affordability biting, eligibility tightening and sentiment cooling, is it the calm(ing) before the storm?

STRONG DEMAND AT THE HIGH END

In contrast, behind closed doors in private boardroom auctions, records are being broken by discreet buyers on the hunt for Melbourne’s $15—$25m “trophy” properties. A Glen Iris mansion just smashed the suburb’s price record by $2.5m, selling for $9m. In fact, weekend curbsides in Melbourne’s leafy green suburbs continue to be crowded, despite falling clearance rates across the board. But, while affordability is less of an issue in the prestige market, properties in the $2 - 5m range are being battered by tougher lending criteria; with some prices dipping as much as 10%. Cash remains king. Credit squeeze anyone?

WAGE GROWTH DISAPPOINTS

Australia’s March quarter wage price index (WPI) was supposed to boost household spending and flame inflation and wage growth but it failed to co-operate. Wages only grew 2.1% in the past year. 2.3% in the public sector and the private sector grew at 1.9% which was the same as inflation. The catch 22 remains: the RBA needs wages growth to increase inflation while business needs inflation to increase wages. Needless to say, this casts doubt over the Coalition’s ambitious budget forecasts.